Answer: The Financial Advisoris a weekly column in

Compute the future worth for the following cashflows

For the following cash flows, compute the futureworth.

For the following cash flows, compute the futureworth.

For a 12% interest rate, compute the value of F so the following cash flows have a future worth of 0.

Compute F so the following cash flows have afuture worth of 0.

Calculate the present worth and the future worth ofa series of 10 annual cash flows with the first cashflow equalto $15,000 and eachsuccessivecashflowincreasing by $1200. The interest rate is 12%.

Sally deposited$100a month in hersavingsaccountfor 24 months. For the next 5 years she made nodeposits. What is the future worth in Sallys savingsaccount at the end of the 7 years, if the accountearned 6% annual interest, compounded monthly?

A 20-year-old student decided to set aside $100 onhis 21stbirthday for investment. Each subsequentyear through his 55thbirthday, he plans to increasethe investment on a $100 arithmetic gradient. Hewill not set aside additional money after his 55thbirthday. If the student can achieve a 12% rate ofreturn, what is the future worth of the investmentson his 65thbirthday?

You can buy a piece of vacantland for $30,000cash.You plan to hold it for 15 years and then sell it ata profit. During this period, you would pay annualproperty taxes of $600. You would have no incomefrom the property. Assuming that you want a 10%rate of return, at what net price would you have tosell the land 15 years hence?

10An individual who makes $32,000 per yearanticipates retiring in 30 years. If his salary isincreased by $600 each year and he deposits 10% ofhis yearly salary into a fund that earns 7% interest,what is the future worth at retirement?

Stamp collecting has become an increasinglypopularand expensivehobby. One favoritemethod is to save plate blocks (usually four stampswith the printing plate number in the margin) ofeach new stamp as it is issued. With rising postagerates and increased numbers of new stamps beingissued, this collecting plan costs more each year.Stamps have been a good place to invest moneyover the last 10 years, as the demand for stampspreviously issued has caused resale prices to incre-ase 18% each year. Suppose a collector purchased 100 worth of stamps 10 years ago, and increasedhis purchases by $50 per year in each subsequentyear. After 10 years of stamp collecting, what is thefuture worth of the stamp collection?

The interest rate is 16% per year and there are48 compounding periods per year. The principal is$50,000. What is the future worth in 5 years?

In the early 1980s, planners were examining alter-nate sites for a new London airport. The economicanalysis included the value of structures that wouldneed to be removed from various airport sites.At one potential site, the twelfth-century Normanchurch of St. Michaels, in the village of Stewk- ley, would have had to be demolished.The plannersused the value of the fire insurance policy on thechurcha few thousand pounds sterlingas thechurchs value.An outraged antiquarian wrote to the LondonTimesthat an equally plausible computation wouldbe to assume that the original cost of the church(estimated at 100 pounds sterling) be increased atthe rate of 10% per year for 800 years. Based onhis proposal, what would be the future worth ofSt. Michaels? (Note:There was great public objec-tion to tearing down the church, and it was spared.)

Bill made a budget and planned to deposit $150a month in a savings account, beginning Septem-ber 1. He did this, but on the following January1, he reduced the monthly deposits to $100. Hemade 18 deposits, four at $150 and 14 at $100. Ifthe savings account paid 6% interest, compoundedmonthly, what was the future worth of his sav-ings immediately after the last deposit?

A company deposits $1000 in a bank at thebeginning of each year for 6 years. The accountearns 8% interest, compounded every 6 months.What is in the account at the end of 6 years?

Don Ball is a 55-year-old engineer. According tomortality tables, a male at age 55 has an averagelife expectancy of 21 more years. Don has accu-mulated $48,500 toward his retirement. He is nowadding $5000 per year to his retirement fund. Thefund earns12%interest. Don will retire whenhe canobtain an annualincome from his retirement fund of$20,000, assuming he lives to age 76. He will makeno provision for a retirement income after age 76.What is the youngest age at which Don can retire?

Jean invests $100 in Year 1 and doubles the amounteach year after that (so the investment is $100, 200,400, 800,...). If she does this for 10 years, andthe investmentpays10% annualinterest, whatis thefuture worth of her investment?

If you invested $2500 in a 24-month bank certifi-cate of deposit (CD) paying 8.65%, compoundedmonthly, what is the future worth of the CD when itmatures

After receiving an inheritance of $25,000 on her21stbirthday, Ayn deposited the inheritance in asavings account with an effective annual interestrate of 6%. She decided to make regular deposits,beginning with $1000 on her 22ndbirthday andincreasing by $200 each year (i.e., $1200 on her23rdbirthday, $1400 on her 24thbirthday, etc.).What was the future worth of Ayns deposits on her56thbirthday?

The Association of General Contractors (AGC) isendowing a fund of $1 million for the ConstructionEngineering Technology Program at GramblingState University. The AGC established an escrowaccountin which 10 equal end-of-year deposits thatearn 7% compound interest were to be made. Afterseven deposits, the Louisiana legislature revisedlaws relating to the licensing fees AGC can chargeits members, and there was no deposit at the endof Year 8. What must the amount of the remainingequal end-of-year deposits be, to ensure that the $1million is available on schedulefor the ConstructionEngineering Technology Program?

A new engineer is considering investing in anindividual retirement account (IRA) with a mutualfund that hasan average annualreturn of 10%.Whatis the future worth of her IRA at age 65 if she makesannual investments of $2000 into the fund begin-ning on her 25thbirthday? Assume that the fundcontinues to earn an annual return of 10%.

IPS Corp. will upgrade its package-labelingmachinery. It costs $150,000 to buy the machineryand have it installed. Operation and maintenancecosts, which are $1500 per year for the first 3 years,increase by 500 per year for the machines 10-yearlife. The machinery has a salvage value of 5% ofits initial cost. Interest is 10%. What is the futureworth of cost of the machinery?

A company is considering buying a newbottle-capping machine. The initial cost of themachine is $325,000 and it has a 10-year life.Monthly maintenance costs are expected to be$1200 per month for the first 7 years and $2000per month for the remaining years. The machine requires a major overhaulcosting $55,000at the endof the fifth year of service. Assume that all thesecosts occur at the end of the appropriate period.What is the future value of all the costs of owningand operating this machine if the nominal interestrate is 7.2%?

A family starts an education fund for their sonPatrick when he is 8 years old, investing $150 onhis eighth birthday, and increasing the yearly invest-ment by $150 per year until Patrick is 18 yearsold. The fund pays 9% annual interest. What is thefunds future worth when Patrick is 18?

A bank account pays 19.2% interest with monthlycompounding. A series of deposits started with adeposit of $5000 on January 1, 2007. Deposits inthe series were to occureach6 months.Each depositin the series is for $150 less than the one before it.The last deposit in the series will be due on January1, 2022. What is the future worth of the account onJuly 1, 2024, if the balance was zero before the firstdeposit and no withdrawals are made?

A recent college graduate got a good job andbegan a savings account. He authorized the bankto automatically transfer $75 each month from hischecking account to the savings account. The bankmade the first withdrawal on July 1, 2012 and isinstructed to make the last withdrawal on January1, 2030. The bank pays a nominal interest rate of4.5% and compounds twice a month. What is thefuture worth of the account on January 1, 2030?

Bob, an engineer, decided to start a college fund forhis son. Bob will deposit a series of equal, semi- annual cash flows with each deposit equal to $1500.Bob made the first deposit on July 1, 2011 andwill make the last deposit on July 1, 2031. Joe, afriend of Bobs, received an inheritance on April1, 2016, and has decided to begin a college fundfor his daughter. Joe wants to send his daughterto the same college as Bobs son. Therefore, Joeneeds to accumulate the same amount of money onJuly 1, 2031, as Bob will have accumulated fromhis semiannual deposits. Joe never took engineer-ing economics and had no idea how to determinethe amount that should be deposited. He decided todeposit $40,000 on July 1, 2016. Will Joes depositbe sufficient? If not, how much should he have putin? Use a nominal interest of 7% with semiannualcompounding on all accounts.

A business executive is offered a management jobat Generous Electric Company, which offers him a 5-year contract that calls for a salary of $62,000per year, plus 600 shares of GE stock at the end ofthe 5 years. This executive is currently employed byFearless Bus Company, which also has offered hima 5-year contract. It calls for a salary of $65,000,plus 100 shares of Fearless stock each year. TheFearless stock is currently worth $60 per share andpays an annual dividend of $2 per share. Assumeend-of-year payments of salary and stock. Stockdividends begin one year after the stock is received.The executive believes that the value of the stockand the dividend will remain constant. If the exec-utive considers 9% a suitable rate of return in thissituation, what must the Generous Electric stockbe worth per share to make the two offers equallyattractive? Use the future worth analysis method inyour comparison.

Pick a discretionary expense that you incur on aregular basis, such as buying cigarettes weekly,buying fashion items monthly, buying sports tick-ets monthly, or going to movies weekly. Assumethat you instead place the money in an investmentaccountthat earns 9% annually.After 40 years,howmuch is in the account?

Cornell has two options for upgrading their ath-letic facilities. The off-campus option costs only$20 million, but it will require frequent bus ser-vice to those facilities at an annual cost that startsat $300,000 and increases by 4% per year. (buses,drivers and mechanics salaries, maintenance, roadwear, etc.). Improving the on-campus facilities willcost $50 million, but no extra transportation costsare required. Both options involve an estimatedannual maintenance cost of $1 million for about40 years before new facilities will again be needed.Using benefitcost ratio analysis, determine whichoption is more economically efficient. Use an inter-est rate of 8% per year.

Each of the three alternatives shown has a 5-yearuseful life. If the MARR is 10%, which alternativeshould be selected? Solve the problem by benefitcost ratio analysis.ABCCost$600.0 $500.0 $200.0Uniform annual benefit 158.3 138.7 58.3

Consider three alternatives, each with a 10-yearuseful life. If the MARR is 10%, which alternativeshould be selected? Solve the problem by benefitcost ratio analysis.AB CCost$800 $300 $150Uniform annual benefit 142 60 33.

An investor is considering buying some land for$100,000 and constructing an office building on it.Three different buildings are being analyzed.Building Height2 Stories 5 Stories 10 StoriesCost of building (excludingcost of land)$400,000 $800,000 $2,100,000Resale valueof land +building after 20-yearhorizon200,000 300,000 400,000Annual net rental income 70,000 105,000 256,000Resale value considered a reduction in costnot a benefit.Using benefitcostratio analysis andan 8% MARR,determine which alternative, if any, should beselected

Using benefitcost ratio analysis, determine whichone of the three mutually exclusive alternativesshould be selected. Each alternative has a 6-yearuseful life. Assume a 10% MARR.ABCFirst cost$560 $340 $120Uniform annual benefit 140 100 40Salvage value40 0 0

Consider four alternatives, each of which has an8-year useful life:ABCDCost$100.0 $80.0 $60.0 $50.0Uniform annual 12.2 12.0 9.7 12.2benefitSalvage value 75.0 50.0 50.0 0 If the MARR is 8%, which alternative should beselected? Solve the problem by benefitcost ratioanalysis.

A government agency is planning a new officebuilding close to its current headquarters. Four pro- posed sites are to be evaluated. Any of these siteswill save the agency $700,000 per year, since twoof its current satellite offices will no longer need tobe rented. The agency uses a 6% interest rate andassumes that the building and its benefits will lastfor 40 years. Based on a benefitcost analysis whatshould the agency do?SiteABCDInitial$8.6M $8.1M $7.5M $6.8McostAnnual 0.12M 0.155M 0.2M 0.3Moperating cost

Contributed by Hamed Kashani, Saeid Sadri, andBaabak Ashuri, Georgia Institute of Technology9- 37Using benefitcost ratio analysis, a 5-year usefullife, and a 15% MARR, determine which of thefollowing alternatives should be selected.ABCDECost$100 $200 $300 $400 $500Uniformannual benefit

Five mutually exclusive investment alternativeshave been proposed. Based on benefitcost ratioanalysis, and a MARR of 15%, which alternativeshould be selected?YearABCDE0$200$100$125$150$22515 68 25 42 52 68

A project will cost $50,000. The benefits at the endof the first yearare estimated to be $10,000,increas-ing at a 10% uniform rate in subsequent years.Using an 8-year analysis period and a 10% interestrate, compute the benefitcost ratio.

A do-nothing and two mutually exclusive alter-natives are being considered for reducing trafficcongestion. User benefits come from reduced con-gestion once the project is complete, while userdisbenefits are due to increased congestion duringconstruction. The interest rate is 9%, and the lifeof each alternative is 15 years. Which alternativeshould be chosen? User benefits ($M/yr)2.1 2.6User disbenefits ($M)1.2 2.1First cost ($M)6.9 9.9Operations and maintenance ($M/yr) 0.75 0.825(a)Use the benefitcost ratio.(b)Use the modified benefitcost ratio.(c)Use the public/government version of the B/Cratio.(d)Assume these numbers apply to a private firmand use a present worth index.(e)Are your recommendations for (a) through (d)consistent? Which measure gives the largestvalue? Why?

A school is overcrowded and there are threeoptions. The do-nothing alternative corresponds tocontinuing to use modular classrooms. The schoolcan be expanded, or a new school can be builtto split the load between the schools. User ben-efits come from improvements in school perfor-mance for the expanded or new schools. If a newschoolis built, there are more benefits becausemorestudents will be able to walk to school, the aver-age distance for those who ride the school buseswill be shorter, and the schools will be smallerand more student friendly. The disbenefits forthe expanded school are due to the impact of theconstruction process during the school year. Theinterest rate is 8%, and the life of each alterna-tive is 20 years. Which alternative should be cho- sen? What is the incremental ratio for the preferredalternative?ABUser benefits ($M/yr)2.1 3.1User disbenefits ($M)0.8 0First cost ($M)8.8 10.4Operations and maintenance ($M/yr) 0.95 1.7(a)Use the benefitcost ratio.(b)Use the modified benefitcost ratio.(c)Use the public/government version of the B/Cratio.(d)Assume these numbers apply to a private firmand use a present worth index.(e)Are your recommendations for (a) through (d)consistent? Which measure gives the largestvalue? Why?

Able Plastics, an injection-molding firm, hasnegotiated a contractwith a nationalchainof depart- ment stores. Plastic pencil boxes are to be producedfor a 2-year period. Able Plastics has never pro- duced the item before and requires all new dies. Ifthe firm invests $67,000 for special removal equip- ment to unload the completed pencil boxes fromthe molding machine, one machine operator can beeliminated. This would save $26,000 per year. Theremoval equipment has no salvage value and is notexpected to be used after the 2-year production con-tract is completed. The equipment,although uselessto Able, would be serviceable for about 15 years.What is the payback period? Should Able Plasticsbuy the removal equipment?

A cannery is considering installing an automaticcase-sealing machine to replace current hand meth- ods. If they purchasethe machine for $3800 in June,at the beginning of the canning season, they willsave $400 per month for the 4 months each year thatthe plant is in operation. Maintenance costs of thecase-sealing machine are expected to be negligible.The case-sealing machine is expected to be usefulfor five annual canning seasons and then will haveno salvagevalue. What is the paybackperiod? Whatis the nominal annual rate of return?

A project has the following costs and benefits.Whatis the payback period?YCostsBenefits0 $14001 5002 300$400310$300 in each year

A car dealer leases a small computer with softwarefor $5000 per year. As an alternative he could buythe computer for $7000 and lease the software for$3500 per year. Any time he would decide to switchto some other computer system he could cancel thesoftware lease and sell the computer for $500. If hebuys the computer and leases the software,(a)What is the payback period?(b)If he keptthe computerand software for 6 years,what would be the benefitcost ratio, based ona 10% interest rate?

A large project requires an investment of $200 mil-lion. The construction will take 3 years: $30 millionwill be spent during the first year, $100 million during the second year, and $70 million during thethird year of construction. Two project operationperiods are being considered: 10 years with theexpected net profit of $40 million per year and 20years with the expected net profit of $32.5 millionper year. For simplicity of calculations it is assumedthat all cash flows occur at end of year. The com-pany minimum required return on investment is10%.Calculate for each alternative:(a)The payback period(b)The total equivalent investment cost at the endof the construction period(c)The equivalent uniform annual worth of theproject (use the operation period of eachalternative)Which operation period should be chosen?

Two alternatives with identical benefits are beingconsidered:ABInitial cost$500 $800Uniform annual cost 200 150Useful life, in years 8 8(a)Compute the payback period if Alt.Bis pur- chased rather than Alt.A.(b)Use a MARR of 12% and benefitcost ratioanalysis to identify the alternative that shouldbe selected.

Tom Sewel has gathered data on the relative costsof a solar water heater system and a conventionalelectric water heater. The data are based on statis-tics for a mid-American city and assume that duringcloudy days an electric heating element in the solarheating system will provide the necessary heat.The installed cost of a conventional electricwater tank and heater is $200. A family of four usesan average of 300 liters of hot water a day, whichtakes $230 of electricity per year. The glass-linedtank has a 20-year guarantee. This is probably areasonable estimate of its actual useful life.The installed cost of two solar panels, a smallelectric pump, and a storage tank with auxiliaryelectric heating element is $1400. It will cost $60a year for electricity to run the pump and heat wateron cloudy days. The solar system will require $180of maintenancework every 4 years.Neither the con-ventional electric water heater nor the solar waterheater will have any salvage value at the end of its useful life Using Toms data, what is the payback period ifthe solar water heater system is installed, rather thanthe conventional electric water heater?

Consider four mutually exclusive alternatives:ABCDCost$75.0 $50.0 $15.0 $90.0Uniform annual 18.8 13.9 4.5 23.8benefitEach alternative has a 5-year useful life and no sal-vage value. The MARR is 10%. Which alternativeshould be selected, based on(a)Future worth analysis(b)Benefitcost ratio analysis(c)The payback period

Consider three alternatives:AB CFirst cost$50 $150 $110Uniform annual 28.8 39.6 39.6benefitUseful life, in years26 4Rate of return 10% 15% 16.4%At the end of its useful life, an identical alternative(with the same cost, benefits, and useful life) may beinstalled.All the alternatives have no salvage value. If theMARR is 12%, which alternative should be selected?(a)Solve the problem by future worth analysis.(b)Solve the problem by benefitcost ratio analysis.(c)Solve the problem by payback period.(d)If the answers in parts (a), (b), and (c) differ,explain why this is the case

Consider three mutually exclusive alternatives. TheMARR is 10%.YearXYZ0$100$50$501251621225162132516214251621(a)For Alt.X, compute the benefitcost ratio.(b)Based on the payback period, which alternativeshould be selected? (c)Determine the preferred alternative based on anexact economic analysis method.

The cash flows for three alternatives are as follows:YearABC0$500$600$9001400302 200 350 2003 250 300 2004 300 250 2005 350 200 2006 400 150 200(a)Based on payback period, which alternativeshould be selected?(b)Using future worth analysis, and a 12% inter-est rate, determine which alternative should beselected.

Three mutually exclusive alternatives are beingconsidered:ABCInitial cost$500 $400 $300Benefit at end of the firstyear200 200 200Uniform benefit at end ofsubsequent years100 125 100Useful life, in years6 5 4At the end of its useful life, an alternative isnotreplaced. If the MARR is 10%, which alternativeshould be selected(a)Based on the payback period?(b)Based on benefitcost ratio analysis?

YearEF GH0$90$110$100$120120 35 0 02203510 03203520 04203530 0520 0 40 06 20 0 50 180(a)Based on future worth analysis, which of the fouralternatives is preferred at 6% interest?(b)Based on future worth analysis,which alternativeis preferred at 15% interest?(c)Based on the payback period, which alternativeis preferred? d)At 7% interest, what is the benefitcost ratio forAlt.G?

Tom Jackson is buying a new car. AlternativeAis an American-built compact. It has an initial costof $8900 and operating costs of 9?c/km, excludingdepreciation. From resale statistics, Tom estimatesthe American car can be resold at the end of 3 yearsfor $1700. AlternativeBis a foreign-built Fiasco. Itsinitial cost is$8000, the operating cost, also exclud-ing depreciation, is 8?c/km. How low could the resalevalue of the Fiasco be to provide equally econom-ical transportation? Assume Tom will drive 12,000km/year and considers 8% as an appropriate interestrate

Victoria is choosing between a standard Honda Civicfor $17,350 or a hybrid Civic for $20,875. She cal-culates her annual cost of ownership including pay-ments but not including gasoline to be $5000 for thestandardand $5800for the hybrid.The standardCivicwill cost Victoria 12?c/mile for gasoline, while thehybrid will cost her only 7?c/mile. How many milesmust Victoria drive in a year before the hybrid vehiclebecomes more cost efficient to her?Contributed by Paul R. McCright, University ofSouth Florida

A road can be paved with either asphalt or con-crete. Concrete costs $15,000/km and lasts 20 years.Assume the annual maintenance costs are $500 forconcrete and $800 for asphalt per kilometer per year.Use an interest rate of 8% per year.Contributed by D. P. Loucks, Cornell University(a)What is the maximum that should be spent forasphalt if it lasts only 10 years?(b)Assume the asphalt road costs $7000 per kilo-meter. How long must it last to be the preferredalternative?

Ithaca is considering a new $50,000 snowplow thatwill save the city $600 per day of use compared to theexisting one. It should last 10 years and have a resalevalue of $2000. To obtain a 12% rate of return whatis the minimum number of days per year on averageit will have to be used.Contributed by D. P. Loucks, Cornell University

A car company has decided to spend $150,000,000on a museum for exhibiting its classic cars. Landcan be purchased for $500,000. The museum build-ing will require 30,000 square feet of general space,while each car displayed will require an additional 1000 square feet. The design and planning processwill cost $100,000, which should be paid immedi-ately. The construction of the building will cost $600per square foot, and the building will be completedwithin the next 2 years, while the cost of construc-tion will be distributed evenly between the 2 yearsof construction. All cars will be purchased duringthe second year of construction at an average costof $120,000 per car. The annual operation of themuseumwill cost $2,000,000 plus $30,000 per car. Ifthe funds are invested at 9% per yearand the museumis to exist forever, how many cars should the trusteesplan to purchase?Contributed by Hamed Kashani, Saeid Sadri, andBaabak Ashuri, Georgia Institute of Technology

Southwest Airlines flies nonstop between Tampa andAlbuquerque with 137-passenger planes. Consider-ing all the costs of owning eachplane plus the salariesfor their crews and the fuel costs and landing fees,SWA engineers have determined that the fixed costfor a single flight is $10,400. If the costs associatedwith each passenger(reservations cost, check-in cost,baggage handling cost, snack cost, etc.) total $48 perpassengerand the averageticket price is $157 (beforethe various taxes are added), what percentageof seatsmust be filled for the flight to break even?Contributed by Paul R. McCright, University ofSouth Florida

Southwest Airlines (SWA) is planning to expand itsfleet of jets to replace some old planes and to expandits routes. It has received a proposal from Boeing to purchase 112 737s over the next 4 years. Whatannual net revenue must each jet produce to breakeven on its operating cost? The analysis should bedone by finding the EUAC for the 10-year plannedownership period. SWA has a MARR of 12%, pur-chases the jet for $22 million, has operating andmaintenance costs of $3.2 million the first year,increasing 8% per year, and performs a major main-tenance upgrade costing $4.5M at end of Year 5.Assume the plane has a salvage value at end of Year10 of $13 million.Contributed by Paul R. McCright, University ofSouth Florida

A newspaper is considering buying locked vendingmachines to replace open newspaper racks in thedowntownarea.The vendingmachinescost$45each.It is expected that the annualrevenue from selling thesame quantity of newspapers will increase $12 per Problems331vending machine. The useful life of the vendingmachine is unknown. (a)To determine the sensitivity of rate of return touseful life, prepare a graph for rate of returnversus useful life for lives up to 8 years.(b)If the newspaper requires a 12% rate of return,what minimum useful life must it obtain fromthe vending machines?(c)What would be the rate of return if the vendingmachines were to last indefinitely?

If the MARR is 12%, compute the value ofXthatmakes the two alternatives equally desirable.ABCost$800 $1000Uniform annual benefit 230 230Useful life, in years5X

If the MARR is 12%, compute the value ofXthatmakes the two alternatives equally desirable.ABCost$150 $XUniform annual benefit 40 65Salvage value100 200Useful life, in years6 6

Consider two alternatives:ABCost$500 $300Uniform annual benefit 75 75Useful life, in years InfinityX Assume that Alt.Bis not replaced at the end ofits useful life. If the MARR is 10%, what must bethe useful life ofBto make AlternativesAandBequally desirable

Chris Cook studied the situation described in Prob-lem 9-48 and decided that the solar system willnotrequire the $180 of maintenance every 4 years.Chris believesfuture replacementsof either the con-ventional electric water heater, or the solar waterheater system can be made at the same costs anduseful lives as the initial installation. Based on a10% interest rate, what must be the useful life ofthe solar system to make it no more expensive thanthe electric water heater system?

Jane Chang is making plans for a summer vacation.Shewill take$1000with herin the form of travelers hecks. From the newspaper, she finds that if shepurchases the checks by May 31, she will not haveto pay a service charge. That is, she will obtain$1000 worth of travelers checks for $1000. Butif she waits to buy the checks until just beforestarting her summer trip, she must pay a 1% ser-vice charge. (It will cost her $1010 for $1000 oftravelers checks.)Jane can obtain a 13% interest rate, com- pounded weekly, on her money. How many weeksafter May 31 can she begin her trip and still justifybuying the travelers checks on May 31?

Fence posts for a particular job cost $10.50 eachto install, including the labor cost. They will last10 years. If the posts are treated with a woodpreservative, they can be expected to have a 15-year life. Assuming a 10% interest rate, how muchcould one afford to pay for the wood preservativetreatment?

A piece of property is purchased for $10,000 andyields a $1000 yearly net profit. The property issold after 5 years. What is its minimum price tobreakeven with interest at 10%?

Rental equipment is for sale for $110,000. Aprospective buyer estimates he would keep theequipment for 12 years and spend $6000 a year onmaintaining it. Estimated annual net receipts fromequipment rentals would be $14,400. It is estimatedthe rental equipment could be sold for $80,000 atthe end of 12 years. If the buyer wants a 7% rateof return on his investment, what is the maximumprice he should pay for the equipment?

The Financial Advisoris a weekly column in thelocal newspaper. Assume you must answer the fol- lowing question. I recently retired at age 65, and Ihave a tax-free retirement annuity coming due soon.I have three options. I can receive (A) $30,976 now,(B) $359.60 per month for the rest of my life, or(C) $513.80 per month for the next 10 years. Whatshould I do? Ignore the timing of the monthly cashflows and assume that the payments are received atthe end of year. Assume the 10-year annuity willcontinue to be paid to loved heirs if the person diesbefore the 10-year period is over.Contributed by D. P. Loucks, Cornell University(a)Ifi=6%, develop a choice table for lives from5 to 30 years. (You do not know how long thisperson or other readers may live.)(b)Ifi=10%, develop a choice table for livesfrom 5 to 30 years. (You do not know how longthis person or other readers may live.)(c)How does increasing the interest rate changeyour recommendations?

A motor with a 200-horsepower output is neededin the factory for intermittent use. A Graybar motorcosts $7000 and has an electrical efficiency of 89%.A Blueball motor costs $6000 and has an 85%efficiency. Neither motor would have any salvagevalue, since the cost to remove it would equalits scrap value. The annual maintenance cost foreither motor is estimated at $300 per year. Elec-tric power costs $0.072/kWh (1 hp=0.746kW). Ifa 10% interest rate is used in the calculations, whatis the minimum number of hours the higher initialcostGraybarmotor mustbe usedeachyearto justifyits purchase?

PlanArequires a $100,000 investment now. PlanBrequires an $80,000 investment now and an addi- tional $40,000 investment at a later time. At 8%interest, compute the breakevenpoint for the timingof the $40,000 investmen

A low-carbon-steelmachinepart, operating in a cor-rosive atmosphere, lasts 6 years, and costs $350installed. If the part is treated for corrosion resis-tance, it will cost $500 installed. How long mustthe treated part last to be the preferred alternative,assuming 10% interest?

Neither of the following machines has any net sal-vage value.ABOriginal cost$55,000 $75,000Annual expensesOperation9,500 7,200Maintenance5,000 3,000Taxes and insurance 1,700 2,250At what useful life are the machines equivalent if(a)10% interest is used in the computations?(b)0% interest is used in the computations?

A machine costs $5240 and produces benefits of$1000 at the end of each year for 8 years. Assumean annual interest rate of 10%.(a)What is the payback period (in years)?(b)What is the breakeven point (in years)?(c)Since the answers in (a)and(b) are different,which one is correct?

Analyze Problem 9-69 again with the followingchanges:(a)What if the property is purchased for $12,000?(b)What if the yearly net profit is $925? c)What if it is sold after 7 years?(d)What if (a), (b), and (c) happensimultaneously?

Analyze Problem 9-55 again with the followingchanges:(a)What if the Fiasco is more reliable thanexpected, so that its operating cost is$0.075/km?(b)What if Tom drives only 9000 km/year?(c)What if Toms interest rate is 6% annually?(d)What if (a), (b), and (c) happen simultane- ously

Analyze Problem 9-63 again with the followingchanges:(a)What ifBs first cost is $1200?(b)What ifBs annual benefit is $280?(c)What if the MARR is 10% annually?(d)What if (a), (b), and (c) happen simultane-ously?

Assume a cost improvement project has only a firstcost of $100,000 and a monthly net savings,M.There is no salvage value. Graph the projects IRRfor payback periods from 6 months to the projectslife ofNyears. The firm accepts projects with a 2-year payback period or a 20% IRR. When are thesestandards consistent and when are they not?(a)Assume thatN= 3 years.(b)Assume thatN= 5 years.(c)Assume thatN= 10 years (d)What recommendation do you have for the firmabout its project acceptance criteria?